Treasuries hold near lows in Europe ahead of Fed

(Reuters) – U.S. Treasuries were mixed in Europe on Monday with the market in wait-and-see mode ahead of a Federal Reserve interest rate meeting and expectations the central bank may ease monetary policy again soon.

The Fed’s policy-setting meeting on Tuesday comes after a disappointing U.S. July payrolls report on Friday, which has boosted talk the central bank could consider or even adopt new measures to further relax monetary policy. The Fed has already said it is weighing its options.

“There is certainly an expectation that the Fed at the very least will signal an increased scope to do something, even if they don’t actually do something just yet,” said Nick Stamenkovic, rate strategist at RIA Capital.

“So the Treasury market could be vulnerable to a bit of profit taking after the strong rally we’ve seen recently, but the macro backdrop remains supportive and yields are unlikely to rise sharply.”

At 5:22 a.m. ET, two-year Treasury yields were almost a basis point higher at 0.5136 percent, having hit record lows of 0.5016 percent on Friday. Ten-year yields were half a basis point lower at 2.8164 percent, with T-Note futures up 7/64 at 124 and 22/32.

Rabobank analyst Philip Marey said the most dovish outcome would be for the Fed to use proceeds from maturing agency MBS holdings to buy new mortgage-backed securities or Treasuries. “This could hardly be called quantitative easing, as it would not expand the size of the Fed’s balance sheet … But it would signal the Fed’s willingness to resort to QE2 if necessary, and thus support market confidence,” Marey said.

The Treasury department will conduct a $74 billion refinancing this week, selling $34 billion yen in three-year on Tuesday, $24 billion yen in 10-year on Wednesday and $16 billion yen in 30-year notes on Thursday.

(Reporting by Kirsten Donovan; Editing by Susan Fenton)

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